System for market hedging and related method

ABSTRACT

A system includes a data collection module that collects data for a plurality of fuels. A selection module selects fuels from the plurality of fuels based on the properties of the fuels to generate sets of fuels. A benchmark generating module that generates fuel commodity benchmarks indicating aggregate qualities of the sets of fuels. A fuel commodity benchmark for a set of fuels is generated based on weighted averages of the properties of the fuels in the set of fuels. A communication module communicates the fuel commodity benchmarks to traders and that receives orders for derivatives contracts from the traders based on the fuel commodity benchmarks. An order processing module processes an order for derivatives contracts based on differences between actual properties of the fuel to be physically delivered under the terms of an operative derivatives contract and the aggregate qualities indicated by an operative fuel commodity benchmark.

CROSS-REFERENCE TO RELATED APPLICATIONS

This application is a continuation of U.S. Ser. No. 13/558,974, filedJul. 26, 2012, which claims the benefit of U.S. Provisional ApplicationNo. 61/513,792, filed on Aug. 1, 2011. The disclosure of the aboveapplications are is incorporated herein by reference in theirentireties.

FIELD

The present teachings generally pertain to systems and methods forenergy market hedging.

BACKGROUND

The statements in this section merely provide background informationrelated to the present disclosure and may not constitute prior art.

Historically, the prices of a large number of fossil fuels such as crudeoils and refined products have been set either by oil producingcountries or determined by the spot market. The Organization ofPetroleum Export Countries (OPEC) official selling price system for allintents and purposes ruled the crude oil market from the early 1970's to1985. Under the OPEC price system, most crude oil sales were transactedas part of long-term contracts having fixed prices and volumes, withprice adjustments made infrequently. However, over the years, more crudeoil trade has taken place using spot and futures prices and contractsales have entailed shorter durations and more flexible terms.

Spot pricing has become widely accepted in energy markets since the U.S.opted to deregulate energy prices about 30 years ago. Under the spotpricing system, many different crude oil prices are set differentiallyto the price of one or more benchmarks. Crude oil benchmarks (also knownas “markers”) were introduced in the mid 1980's. Most term contracts arenow linked to the spot prices of benchmark crude oils, rather thanpriced at an outright level.

The use of futures and options contracts for energy commodities becamemore popular in the 1980's, more than a century after commodity exchangetrading commenced in the U.S. and Europe. Futures contracts enableowners of assets to obtain price protection against adverse pricemovements. The buyer is obligated to purchase an asset (or the seller tosell an asset) at a predetermined future date and price. Futurescontracts specify the quality and quantity of the underlying asset andare standardized to facilitate trading on exchanges that are typicallyregistered with and regulated by one or more governmental organizations.

While holders of futures contracts are obligated to buy or sell theunderlying asset at expiration, an options contract gives the holder theright to buy or sell. Thus, options can be a used as means to hedgefutures contracts.

Whereas futures and options contracts are traded over a centralizedexchange, another form of hedging involving use of over-the-counter(OTC) derivatives agreements has gained popularity, albeit amid mountingcontroversies and closer scrutiny from government regulators, as well asthe population at large. OTC derivatives are bilateral contracts wherebytwo parties agree on how a particular trade is settled in the future,with the 3 most common contract types being:

Forwards: agreements to exchange at some fixed future date a givenquantity of a physically delivered commodity for a currently definedprice.Swaps: financial agreements settled by cash rather than any transfer ofthe underlying commodity, which provides price protection for an agreedquantity of a commodity on an agreed future date (usually greater thanone month but less than 2 years after the trade date).Spreads: agreements designed to allow producers to lock in differentialsbetween commodity prices at different times (“calendars”) or betweendifferent commodities (“cracks”); in either case, the purchaser/producerpays a pre-agreed fixed spread level in exchange for a floating spreadlevel obtained from the provider in transactions that are usuallyfinancially settled.

Most OTC derivatives involve the use of intermediary banks, rather thanany centralized exchange, to serve as counterparties matching buyerswith sellers. In the process of becoming prominent (if not dominant) OTCderivatives dealers, some of the world's largest banks stand accused ofmaking markets that lack transparency (i.e., in terms of pricediscovery, volume and counterparty risk) in order to generate largeprofits at the risk of incurring major losses in the event thatcounterparties fail to honor their committed trade obligations.

OTC derivatives drew heavy criticism in the aftermath of the Enronscandal of about 2001 and more recently came under even closer scrutinyas the unbridled proliferation of Credit Default Swaps and other OTCinstruments led to the demise of Bear Stearns, Lehman Brothers, AIG etal, as well as the ensuing financial crisis that morphed into the GreatRecession. As a result, several regulatory initiatives have emergedglobally to alter the future of OTC derivatives use. The goal of theseregulatory initiatives is to ensure that private contracts betweencounterparties will become transparent instruments settled by centralclearinghouses imposing stricter margin policies to enhance credit riskmanagement and publish more fulsome order, price and volume data.

Major regulatory initiatives on the docket include the Dodd-Frank WallStreet Reform and Consumer Protection Act and similar measures beingpursued outside the U.S.; more rigorous capital, leverage and liquiditystandards from the Basel Committee on Banking Supervision; andInternational Financial Reporting Standard No. 9 promulgated by theInternational Accounting Standards Board. The initiatives call for,inter alia, substantial changes in classifying and measuring financialinstruments, the wider use of “mark-to-market” rules and increased hedgeaccounting and disclosure requirements, as well as for the instrumentsto be centrally cleared and settled by qualified clearinghouses imposingmargin rules. In all likelihood, such initiatives will intensifyregulatory capital pressures on banks and affect the ability of, and themeans by which, banks maintain their liquidity. As a result, some bankswill undoubtedly be curtailed if not precluded from dealing in OTCderivatives and in that process the types traded in the past may becomeless liquid and thus less attractive to trade.

In most cases involving exchange-traded energy futures and options, aswell as OTC derivatives, benchmarks indicate crude oil quality andgeographic location. They are useful referencing tools for buyers andsellers because there are so many varying grades of crude oil producedthroughout the world. According to the International Crude Oil MarketHandbook published by the Energy Intelligence Group, there are around200 crude oil blends produced in 46 countries, all varying in terms ofcharacteristics, quality and market penetration. Following are the mostcommon crude oil benchmarks used in global commerce:

West Texas Intermediate (WTI) is light sweet crude oil with 39.6°American Petroleum Institute (API) gravity, 0.24% sulfur content and adelivery point in Cushing, Okla. (USA). Although WTI is a U.S. grade ofcrude oil, it has attained global benchmark status, inter alia becauseWTI futures and options contracts amassed substantial trading volumegains in the past decade or so from speculators and financial investorsaround the world. In addition to being a spot market bench-mark, WTIfutures and options trade in denominations of 1,000 barrels per contractat the CME Group Nymex (formerly New York Mercantile Exchange) and atthe Intercontinental Exchange (ICE) in London.

Brent is comprised of five (5) light sweet crude oil grades with blendedAPI gravity of 38.06° and 0.37% sulfur content. Sourced from the NorthSea and refined mostly in NW Europe, Brent is also touted as a globalbenchmark, in particular for large tanker shipments heading west to N.America from Europe, Africa and the Middle East. Brent futures andoptions are primarily traded at the ICE in denominations of 1,000barrels per contract. Prior to September 2010, there were typicallyfairly small WTI-Brent price differentials (+/−$3 per barrel, with WTIusually exceeding Brent due to higher quality API gravity and lowersulfur content). However, in late 2010, differentials diverged from theprevious norm, expanded and eventually exceeded $18 per barrel in March2011—with Brent exceeding WTI—due to a variety of factors detailed laterherein, all of which has prompted concerns about the extent to whichBrent and WTI will be able to maintain their status as globalbenchmarks.

DME Oman Crude Oil futures and options are listed at the DubaiMercantile Exchange (DME; a collaborator and affiliate of the CMEGroup), traded in denominations of 1,000 barrels per contract andspecified as having API gravity of 31.0°, 2.0% sulfur content and adelivery point in Oman. DME was launched in June 2007 with a goal tobring about fair and transparent price discovery and efficient riskmanagement to the East of Suez market, considered the fastest growingcommodities market and largest crude oil supply and demand corridor inthe world. DME Oman Crude Oil is the explicit and sole/official sellingprice benchmark for Oman (output of 812,000 barrels per day or bpd) andDubai (output of 54,000 bpd but in decline), which have purportedly beenviewed (at least by the DME) as markers for heavy sour ME crude oilgrades exported to the Asia-Pacific region. However, due to somelimitations associated with inter alia an Oman delivery point and therelatively small output of marker oil fields in Dubai and Oman, theaverage daily volume (ADV) of DME Oman Crude Oil futures and optionscontracts are arguably well below the levels reasonably expected for aviable global (or even regional) benchmark, to the point such that, asof the end of 2009, the CME Group elected to write off the $28.6 millioncarrying value of its investment stake in the DME because it wasimpaired.Argus Sour Crude Index (ASCI) is listed at the CME Group's Nymex and theICE. ASCI is based on three medium sour Gulf of Mexico crudes (Mars,Poseidon and Southern Green Canyon) with a blended average of 29.3° APIgravity and 2.03% sulfur targeted for processing by U.S. Gulf Coastrefineries. So far, ASCI has been adopted as a benchmark (subject to amyriad of differential adjustments) for spot market sales by SaudiAramco and Kuwait Petroleum (in 2009) and Iraq's Somo (in 2010). MEcrude oils priced against ASCI include Arab Extra Light, Arab Light,Arab Medium, Arab Heavy, Kuwait Export Blend, Basrah Light and Kirkuk.While ASCI might well be more suitable than the light sweet WTI andBrent benchmarks for spot markets and long-term contract arrangementsnegotiated by ME exporters with U.S. Gulf Coast refineries, ASCI pricingand other methodology (see www.argusmedia.com/methodology) is arguablytoo cumbersome to generate efficient futures and options contracttrading on a wider global scale, especially in connection with MEexports to East of Suez markets, which inter alia include India,Singapore, Hong Kong, China, Taiwan, South Korea and Japan.Urals is a reference oil brand used as a basis for pricing a principallyRussian export oil mixture (specified with 31.8° API gravity and 1.35%sulfur) extracted from the Urals and Volga regions along with lightercrude oils from Western Siberia. It is supplied through the Novorossiyskpipeline system and over the Druzhba pipeline. Urals futures trade onthe Russian Trading System (stock exchange), as well as at the CMEGroup's Nymex, where it is known as Russian Export Blend Crude Oil(REBCO). While Urals are not yet material to the context of this hedgingapparatus, they are nonetheless noted due to the planned increase ofcrude oils to be exported from Russia to China over the newly openedESPO (Eastern Siberia to Pacific Ocean) pipeline delivering Russian oilto energy hungry China.

In assessing the benchmarks noted above, it becomes clear that, for allintents and purposes, the CME Group's Nymex and the ICE, along withtheir affiliated exchanges around the world, enjoy a virtual duopoly inthe global crude oil futures and options trading arena, as currentlyshaped. Perhaps more than anything else, this reflects the fact that WTIand Brent are prime light sweet crude oils coveted by highly regulatedrefineries for their low sulfur content and efficiency in generatinghigh quality refined products. Compared to ME crudes having relativelylower API gravity and higher sulfur content, WTI and Brent are mucheasier to refine into cleaner gasoline (generally 30 ppm sulfur content)and diesel (generally 10-15 ppm sulfur called ultra-low-sulfur or ULSD)fuels mandated by U.S., West European and other (OECD) governmentenvironmental protection agencies (EPAs).

However, that model is not practicable for the rest of the world, wheresulfur levels in gasoline and diesel fuels often amount to 500 ppm inmajor developing countries and several thousand ppm in others. Hugeinvestments would be required for those countries to substantiallychange over (or build new) refineries to implement cleaner engine, fueland emission control programs, which could take decades to rationalizeand fund. That assumes it would even be feasible or affordable to do so,at all, since the light sweet crude oil phenomenon known as Peak Oil(discussed more fully later herein) lurks in the background. In thatevent, creating even greater (non-OECD) demand for light sweet crude oilresources would likely cause hyper-inflation on a global scale capableof crashing most, if not all economies. That approach seems foolish,even wasteful, considering that there are much larger (and growing)reserves of relatively heavier and sour crudes that can be tapped wellinto the future.

WTI and Brent futures and options traded at CME Group's Nymex and theICE have appealed to Western/OECD buyers and sellers, especially thoseindulged speculators who have skyrocketed their open interests whilecreating volatile/spiraling prices via high frequency trading programsthat demand trade execution speeds of single digit milliseconds (andheaded for microseconds), thereby driving ADV to record heights. WTI andBrent have also been tolerated in the past by ME exporters and theircustomers wanting to hedge but lacking better alternatives. In doing so,they have resorted to complex Platts and Argus (specialist energypublishers) assessment-based OTC derivatives, often using one or theother as their benchmark but requiring numerous differentialadjustments, an overly complex and increasingly inefficient exercise dueinter alia to increasingly apparent flaws with these benchmarks.

As mentioned above, the WTI-Brent spread has gone from being relativelytight to a scenario whereby WTI now sells at a considerable (often $10+per barrel and recently $18+ per barrel) discount to Brent, even thoughWTI is higher quality crude and it costs extra to ship Brent to the U.S.This anomaly may be attributed to several factors.

First, having WTI's delivery point in Cushing, Okla., is limiting andstorage has become problematic, even though capacity has steadily beenraised to handle an influx of Canadian crudes coming in via pipeline,along with the new oils produced in North Dakota that have causedaggregate U.S. crude output to just increase for the first time in 23years. Because it is easier to move oil from major producing regions toCushing than to move oil from Cushing to refineries (especially U.S.Gulf Coast refineries that also import ME crudes) and consumers, thesupply bottle-necks being created there are not expected to go away anytime soon. WTI prices are expected to remain in a substantial discountmode (to Brent) and thus be less appealing to traders of ME crude oils.

Further complicating matters, North Sea oil production is decliningwhile European and Asian (especially Chinese) demand for diesel andother distilled products has increased. It should be noted that, whereasWTI tends to generally be more favorable for gasoline products, Brentgenerally tends to favor production of diesels and other distillates.Thus, added distillate demand for Brent in the face of lower North Seaproduction has caused supplies to decline and prices to rise. Adding tothe fray is the recent turmoil in Africa (especially countries withdesirable low sulfur crudes, such as in Libya) and the ME that will notlikely be resolved any time soon and could grow worse, all of whichcurrently tends to be reflected more in Brent prices than WTI. Thebottom line is that WTI and Brent each have exposed flaws that arecausing traders to question their viability as global benchmarks,especially as it relates to crude oils produced in the ME.

It is generally recognized that market prices of so-called “landlocked”crude oil have become increasingly impacted by qualitative factors otherthan API gravity and sulfur content. This particularly holds true inNorth America (NA) where production levels have surged in the last fewyears and are projected to continue to increase. The relative geographiclocation of producer wells and terminal facilities on one hand versuscustomer refineries on the other, plus a slew of logistics challengesconverging midstream to create bottlenecks, have spawned intermodalpermutations, including those pertaining to inter alia pipeline, boat,rail and/or truck solutions, each of which is integral to current marketdynamics, thus generating substantial price differentials. Such factorslend support for novel hedging instruments, such as those originallyspecified in the Parent Application and advanced herein, to help marketparticipants better manage risks of price movements in the future.

The crude oil market in NA is undergoing enormous change. Structuralshifts resulting from U.S. light sweet oil shale plays at Eagle Ford(below much of South and East Texas) and Bakken (below parts of Montana,North Dakota and Canada's Saskatchewan province), as well as a growinginflux of Canadian oil grades competing for strained (albeit graduallygrowing) storage and transportation infrastructure in the U.S., havecaused significant price dislocations leading to calls for greatermarket transparency.

According to industry experts, such structural shifts will likely promptpricing alternatives to West Texas Intermediate (WTI), which until quiterecently was NA's singular crude oil benchmark for all intents andpurposes. The convergence of such factors as rising Canadian and Bakkenproduction, in tandem with pipeline capacity shortages within thecrucial midcontinent to U.S. Gulf Coast (USGC) corridor, have steadilyweakened WTI prices the past couple of years versus those for USGCdomestic grades and the major international waterborne blend, Brent.Already, there are cases involving the referencing of Eagle Ford salesto Louisiana Light Sweet crude prices.

It remains desirable to provide more alternatives for cases dealing withlandlocked crude oil delivered to designated (principally refinery)destinations via intermodal permutations involving inter alia storageterminal, pipeline, boat, rail and/or truck solutions.

SUMMARY

In light of the above, the timing is now ripe for new benchmarks,indexes and attendant exchange policies and technologies that arecorrelated with logistical and financial factors unique to landlockedcrude oils, including but not limited to those produced in NA, and/orthose that are correlated with cultural, geopolitical, environmental,logistical and financial factors unique to developing countries thatmust tolerate a wider quality range of petroleum products to powereconomic growth than developed (OECD) nations that are seeminglycommitted at virtually any cost to EPA initiatives requiring mandatedultra-low-sulfur (ULS) fuels.

The drivers of this novel energy hedging system are crude oil andrefined product benchmarks noted below alongside certain relevantinformation obtained from the Energy Intelligence Group's 2010 studytitled Crude Oils and their Key Characteristics:

Middle East Weighted Average (MEWA) Extra Light Crude Oil yielding aweighted average blend API gravity of 39.66° and sulfur content of0.99%, comprised of the following:

Saudi Arabian Extra Light (API gravity of 39.5° and sulfur of 1.07%)

Abu Dhabi (UAE) Murban (API gravity of 39.6° and sulfur of 0.79%)

Abu Dhabi Umm Shaif (API gravity of 36.5° and sulfur of 1.39%)

Abu Dhabi Zakum (API gravity of 40.9° and sulfur of 1.03%)

Qatar Dukhan (API gravity of 41.1° and sulfur of 1.22%)

MEWA Light Crude Oil yielding a weighted average blend API gravity of33.15° and sulfur content of 1.69%, comprised of the following:

Saudi Arabian Light (API gravity of 33.0° and sulfur of 1.83%)

Iran Light (API gravity of 33.4° and sulfur of 1.36%)

Oman (API gravity of 33.0° and sulfur of 1.14%)

Abu Dhabi Upper Zakum (API gravity of 34.0° and sulfur of 1.89%)

Qatar Marine (API gravity of 32.7° and sulfur of 1.47%)

Iran Lavan Blend (API gravity of 35.2° and sulfur of 1.78%)

Iran Sirri Island (API gravity of 33.3° and sulfur of 1.79%)

Iran Daroud (API gravity of 32.8° and sulfur of 2.90%)

MEWA Medium Crude Oil yielding a weighted average blend API gravity of29.75° and sulfur content of 2.49%, comprised of the following:

Saudi Arabian Medium (API gravity of 30.5° and sulfur of 2.56%)

Kuwait Export (API gravity of 30.5° and sulfur of 2.60%)

Iran Foroozan (API gravity of 30.1° and sulfur of 2.31%)

Iraq Basrah (API gravity of 30.2° and sulfur content of 2.52%)

Fateh Dubai UAE (API gravity of 30.4° and sulfur of 2.13%)

Iran Heavy (API gravity of 29.5° and sulfur of 1.99%)

Khafji Neutral Zone (API gravity of 28.5° and sulfur of 2.85%)

Qatar Al-Shaheen (API gravity of 28.0° and sulfur of 2.37%)

Saudi Arabian Heavy (API gravity of 27.6 and sulfur of 2.94%)

Unleaded gasoline (95 RON) with 500 ppm sulfur contentGasoil (diesel fuel) with 500 ppm sulfur contentHeavy fuel oil (HSFO 180) with 35,000 ppm sulfur content

Crude oil is a myriad of organic compounds that vary from one oilfieldto another. Carbon and hydrogen typically make up over 95% of crude oilcontent. Crude oil is classified inter alia as paraffinic, napthemic,aromatic or asphaltic based on their proportion of hydrocarbon seriesmolecules, a key indicator of their physical and chemical properties.Remaining crude oil content is typically made up of sulfur (oftenranging from 0.25%-3.00%), as well as nitrogen, oxygen, metals and salts(<1% for each). The exact composition determines the product mixobtainable from the crude oil and its relative ease of being refined.Each refiner's valuation assessment tends to be relatively unique,depending on the refining technology it employs.

Crude oil quality is best determined by an assay test, which providesvolumetric and weight yields of standard distillation fractions expectedwhen the oil is refined into products such as gasoline, diesel fuel,kerosene and jet fuel, as well as non-vaporized residuals usable as fueloil. Assays indicate key characteristics of raw crude oil, includinggravity, sulfur content, viscosity, pour point and volatility. Theenergy market hedging system described herein is principally focused onthe variability of API gravity and sulfur content among crude oilsproduced at ME oil fields. As noted, they have a 13.5° API gravitydifferential (Qatar Dukhan versus Saudi Arabian Heavy) and 2.15% sulfurcontent differential (Saudi Arabian Heavy versus Abu Dhabi Murban).

API gravity, the most commonly used density scale, is a measure of howheavy or light any petroleum liquid is to water. The higher the APIgravity number, the lighter the crude. Crude oils with low carbon, highhydrogen, and high API gravity tend to be rich in paraffin and yieldgreater portions of gasoline and light petroleum products. Althoughprecise definitions vary according to the petroleum province andmarketing circumstances, generally crude oil gravity under 20° isconsidered heavy; 20°-34° is considered medium and over 34° isconsidered light. All other factors considered equal, the higher thegravity, the greater the value of the crude oil.

Sulfur content, traditionally expressed in terms of a percentage orparts per million (ppm), is another important aspect of crude oilquality. All other factors considered equal, the greater the sulfurpercentage, the lower the quality (and value) of the crude oil. Sulfurvolumetrically reduces the Btu content of crude oil, is corrosive torefineries and pipelines and thus produces lower value products. As ageneral rule, heavy crude oils tend to have a greater proportion ofsulfur because it binds easily to heavy molecules. The same is true forpetroleum products with sulfur usually being concentrated in heavy fueloils (residuals). However, it is not always the case, and it is notnecessarily a linear relationship; thus, the percentage of anyparticular crude oil's sulfur content is usually cited along with itsAPI gravity.

When considering the impact of quality on refiners' demands forparticular crude oils and the prices they are willing to pay, it isimportant to understand that such demand is derived mainly from thevalue of the products the crude oil will produce, which essentiallydepends on the cost of refining that crude and the revenue streamexpected from its refined products. Rising or falling refined productprices do not have a uniform impact on all types of crude oil. Ifgasoline prices rise or heavy fuel oil prices fall, there may well be animpact on relative crude oil prices. Certain product price adjustmentscause some refiners to buy a lighter mix of crude oils as they seek toproduce more gasoline and less heavy fuel oil. This, in turn, willlikely cause the price differential between various grades of crude oilto change, with heavy crude oil prices selling at a greater discount tolight crudes. Likewise, unexpected breakdowns in desulfurizationequipment at key refineries can change the relative value of sour andsweet crudes.

In the last few decades, EPA regulations have impacted energy prices,essentially by causing the demand for light sweet crude oil tointensify. Businesses and governments in wealthy OECD countries havespent many billions of dollars on gasoline and diesel fueldesulfurization initiatives intended inter alia as technology enablersfor clean new engines and emission control systems designed to reducepollutants, especially particulate matter (PM), NOx and SO2. A classicexample is what has occurred in connection with diesel fuels.

Sulfur levels in diesel fuels employed by highway and non-road vehicleswere for a long time limited to 0.5% (5,000 ppm) per ASTM internationalstandards. During the 1990's, fuel quality became more regulated byEPAs, with the first major move dropping the limit to a then “low” levelof 0.05% (500 ppm), driven at the time by legitimate desires to reducesulfur's impact on PM emissions, especially sulfate particulates in theform of tiny hydrated sulfuric acid droplets. Running parallel with fueldesulfurization initiatives were new engine technologies and dieselparticulate filters (DPFs) designed to burn soot (uncombustedhydrocarbons) in the exhaust. In order to help compensate for therelatively low exhaust temperature profiles of vehicles caught intypical urban stop-and-go drive cycles, precious metal catalyzed DPFswere designed to lower soot ignition temperatures. Unfortunately, it isproven that catalyzed DPFs are vulnerable to sulfur poison, whichrequired lowering sulfur content levels, ultimately way below 500 ppm.

According to the Diesel Emission Control—Sulfur Effects (DECSE) ProjectSummary of Reports produced for the U.S. Department of Energy (DOE) byNational Renewable Energy Laboratory(www.nrel.gov/docs/fy02osti/31600.df), catalyzed DPFs are capable ofeliminating 95% of PM when diesel fuel with 3 ppm (0.0003%) sulfurcontent is used, albeit that is a commercially rare fuel. However, PMreduction efficiency falls to 67% when 30 ppm sulfur fuel is burned anddrops all the way down to 0% efficiency with 150 ppm level fuel. Assulfur levels go beyond 150 ppm, an increase in the counteractiveconversion of SO2 gases to sulfate-laden PM takes place—reflecting theimpact of high exhaust temperatures (favoring SO3 production) andpresence of precious metal catalysts to oxidize SO2 gases—to the pointwhere PM emissions more than double baseline levels when 350 ppm sulfurdiesel fuel is employed.

Thus, the U.S. and other OECD countries have opted to mandate ULSD fuels(10 to 15 ppm), in essence to mitigate counteractive SO2 conversion andprevent catastrophic sulfur poison failure of expensive emission controlsystems using catalyzed DPFs. Because they are unable to rationalize orafford OECD-centric engines, emission control systems and ULSD fuel,most other countries around the world commonly employ fuels ranging from350 ppm to several thousand ppm sulfur content.

OECD countries and businesses implementing the initiatives noted abovespent many billions of dollars changing over refineries and pipelines todesulfurize and refine crude oil into compliant ULS fuels complementingnew engines and emission controls systems. Unfortunately, those emissioncontrol systems not only remain vulnerable to sulfur poison failures butconcerns have surfaced regarding their unintended adverse healthconsequences, e.g. toxic volatile ultrafine and nano-sized PM thatnonetheless escape the tailpipes of clean new vehicles equipped withcatalyzed DPF after-treatment systems, as reported by the Health EffectsInstitute on Mar. 14, 2011 in its report titled The Future of VehicleFuels and Technologies: Anticipating Health Benefits and Challenges(http://pubs.healtheffects.org/getfile.php?u=634). At a minimum,developing countries will “wait-and-see” what transpires from thoseissues while they assess the extent to which they could ever fund allthe costs needed to implement similar measures.

In any event, whilst mandated fuel sulfur limits fell from 5,000 to 500to ultimately 10-15 ppm, the ensuing demand for light sweet crude oilexacerbated Peak Oil fears that the world will be unable to affordablymeet all of the energy needs of industrialized, as well as emerging anddeveloping countries, seeking economic expansion. Peak Oil fears, alongwith the machinations of those indulged speculators spiking WTI andBrent ADV at CME Group's Nymex and the ICE, have instilled a strong“net-long” trading bias that is highly correlated with volatile andrising fuel prices, and indirectly linked with rising food prices causedby renewable fuels programs such as ethanol (corn) and bio-fuels (soybeans) designed to supplement/replace fossil fuels.

Extending beyond emission control measures focused on populated landmass areas, certain EPAs recently coordinated with the InternationalMaritime Organization (IMO) to establish more stringent standards foroceangoing vessel (OGV) emissions. OGVs include inter alia passengeryachts, ships, and oceanliners, container ships, bulk carriers, ro-roships, reefers, crude oil, chemical and gas tankers, tug boats and navalvessels. OGVs carry about 90% of world trade (including two-thirds ofall crude oil and refined products globally consumed) covering tens oftrillions in tonne-miles per year. Although vessel owners consider theirrelative environmental footprints to be light compared to othertransport modes, they indisputably emit massive amounts of air pollutionas their engines burn heavy residual and distillate fuels with highsulfur content, often several thousand times that of ULSD fuels.

Effective Jul. 1, 2010, shippers started facing regulations to eitherburn fuels with lower sulfur content or install after-treatmentsolutions that represent sustainable alternatives to newly promulgatedfuels by causing equivalent reductions in SOx/SO2 to help eliminate PMand other pollutants. Currently, OGVs inside designated EmissionControlled Areas (ECAs; generally within 200 miles of major coastalports) must burn fuels containing less than 10,000 ppm sulfur, a limitthat is scheduled to drop to 1,000 ppm in 2015. Elsewhere (on the highseas), the IMO called for OGV fuel sulfur limits to be reduced inJanuary 2012 from 45,000 ppm to 35,000 ppm (or an after-treatmentequivalent), then to 5,000 ppm in 2020, although the latter iscontingent on the results of a fuel availability study to be completedin 2018.

Newly promulgated OGV fuels are expected to cost considerably more (60+%is already evidenced) than heavy fuel oils (residuals) hithertoemployed, many of which are key byproducts of ME refiners. Their futureadoption could further exacerbate Peak Oil concerns by impeding effortsto globally balance crude oil reserves, production and refinery outputin an orderly fashion; ergo, the contingency associated with 2018 fuelavailability study.

As expected, companies are actively vying to offer sustainableafter-treatment solutions. So far, most come in the form of marinescrubber systems designed to exploit the natural buffering capacity ofseawater to desulfurize OGV exhaust gases (SO2) and discharge thepurportedly harmless effluent into the sea. Those and othertechnological developments, as well as more regulatory actions, areexpected to create ongoing price volatility tied to sulfur content inthe years ahead.

Barring major technological breakthroughs, most developing and lesserdeveloped countries cannot afford (without considerable OECD subsidies)costs of implementing similar programs. However, as more sophisticatedrefinery capacity comes online in Asia and the ME later this decade andthe next to process relatively heavier and sour crude oils, viableinitiatives should emerge that are capable of reducing gasoline anddiesel sulfur levels from several thousand to 500 ppm, if not lower, ona wider scale. Such developments will no doubt affect supply and demandfor the varying grades of ME crude oils and thus create relative marketprice volatility.

Thus, the following complementary indexes have been designed to enabletraders engaged over the attendant global energy exchange referred tohereafter as Global Energy e-Bourse or the “Exchange” to transparentlytrade quality/value differentials associated with API gravity and sulfurcontent:

Crude Oil API Gravity Value Index based on 1.0° differentials betweenthe operative crude oil benchmark and the actual crude oil to bedelivered in cases where futures contracts are settled by physicaldelivery (“EFP Futures”)Crude Oil Sulfur Content Value Index based on 0.1% differentials betweenthe operative crude oil benchmark and the actual crude oil to bedelivered in cases where EFP Futures are tradedGasoil (Diesel Fuel) Quality Value Index based on 500 ppm differentialsin sulfur content between the operative gasoil benchmark and the actualgasoil to be delivered in cases where EFP Futures are tradedResidual (Heavy Fuel Oil) Quality Value Index based on 5,000 ppmdifferentials in sulfur content between the operative heavy fuel oilbenchmark and the actual heavy fuel oil to be delivered in cases whereEFP Futures are traded

Tanker transit and warehouse lease rate indexes are also tied to thissystem. As noted above, OGVs carry two-thirds of all crude oil andrefined products globally consumed. That is particularly the case for MEcrude oils and refined products exported via tanker deliveries tocustomers located throughout the world, especially in the growing Eastof Suez market. The most common tanker vessels carrying ME cargo are (i)very large crude carriers (VLCC) hauling up to 2,200,000 barrels(320,000 DWT) of crude oil from the Arabian/Persian Gulf to theLouisiana coast (the only U.S. port area large/deep enough to handleVLCCs) and East of Suez markets; and (ii) Suezmax tankers, named forbeing the largest vessels able to transit the Suez Canal with full cargoloads (up to 1,100,000 barrels or 160,000 DWT of crude oil). Each vesselcommonly carries several types or grades of crude and hulls areseparated into up to 10 banks, allowing for multiple loads anddischarges.

Shipping markets have grown ever-riskier as fluctuations in freightrates and ship prices have increased substantially in recent years.Various instruments currently exist to hedge those risks but seldominvolve the relative transparency and security of a centralizedcommodity exchange. Instead, the OTC derivatives agreements typicallyentered into for risk management purposes often employ tankerbrokers—intermediaries between ship owners and the charterers who useships to transport cargo—that specialize in crude oil, gas, oil productsor chemical tankers.

Since OTC derivatives now face new regulatory standards, theonce-private contracts between tanker counterparties will likely betransitioned into more transparent instruments settled by centralclearinghouses imposing stricter margin policies to enhance credit riskmanagement and publish more fulsome order, price and volume data.

Recognizing these new demands, this invention's Global Energy e-Bourseprovides the following tanker related indexes:

Tanker Transit Lease Rate Indexes (VLCC and Suezmax, respectively)facilitate the use of futures and options contracts designed to hedge orspeculate as to future daily rates charged for tankers moving over thehigh seas in route to deliver their cargo. Those indexes can also beused in forward and swap agreements that will additionally trade atGlobal Energy e-Bourse.Tanker Warehouse Lease Rate Indexes (VLCC and Suezmax, respectively) usefutures, options, forwards and swaps to hedge or speculate as to futuredaily rates charged for tankers floating at sea to warehouse cargo interalia with an expectation that it can be sold in the future at higherprices.

The present teachings provide a system for energy market hedgingoperative to manage adverse price movement risks faced by Middle East(ME) oil producers and refiners, as well as globally scattered partiespurchasing, shipping, storing, processing and consuming varying gradesof ME crude oil, gasoline, distillates and residual fuel oil, whileoffering authorized speculators potential profits from market pricevolatility.

The system comprises an all-electronic exchange platform executingorders over a secure web-based Cloud network dedicated to transparenttrading of energy derivatives (inter alia futures, options, forwards,swaps and spreads) cleared and settled via physical delivery or cashpayments facilitated by affiliated or independently contractedclearinghouses. The derivatives are linked to benchmarks andcomplementary indexes (including but not limited to those listed below)correlated with financial, logistical, geopolitical and environmentalfactors unique to developing countries employing a relatively wide rangeof petroleum quality grades conducive to practicably power economicgrowth, rather than ultra-low-sulfur fuels mandated by environmentalprotection regulators in developed countries advocating relativelystringent emission control standards and systems:

Middle East Weighted Average (MEWA) Extra Light crude oil

MEWA Light crude oil

MEWA Medium crude oil

Unleaded gasoline (95 RON) with 500 ppm sulfur content

Gasoil (diesel) with 500 ppm sulfur content

Heavy fuel oil (HSFO 180) with 35,000 ppm sulfur content

Crude Oil API Gravity Value Index based on 1.0° differential

Crude Oil Sulfur Content Value Index based on 0.1% differential

Gasoil (Diesel Fuel) Quality Value Index based on 500 ppm differentialsin sulfur content

Residual/Heavy Fuel Oil Quality Value Index based on 5,000 ppmdifferentials in sulfur content

Gasoil Crack Spread (difference between specified volumes of 500 ppmGasoil and MEWA Light Crude Oil)

Tanker Transit Lease Rate Indexes (VLCC and Suezmax, respectively)

Tanker Warehouse Lease Rate Indexes (VLCC and Suezmax, respectively)

Further areas of applicability will become apparent from the descriptionprovided herein. The description and specific examples in this summaryare intended for purposes of illustration only and are not intended tolimit the scope of the present disclosure.

DRAWINGS

The present teachings will become more fully understood from thedetailed description, the appended claims and the following drawings.The details within the various views of the drawings will be understoodto be drawn generally to scale.

FIG. 1 illustrates the trading exchange data flow patterns using asystem for energy market hedging in accordance with the presentteachings;

FIG. 2 depicts examples of data regarding various crude oils produced inthe Middle East, which underlie the aforementioned crude oil benchmarksand are subject to change from time to time;

FIG. 3 is a functional block diagram of a system for energy markethedging in accordance with the present teachings;

FIG. 4 is a functional block diagram of a computing device;

FIG. 5 is a functional block diagram of a server for the system of FIG.3; and

FIG. 6 is a flowchart of a method for energy market hedging inaccordance with the present teachings.

DETAILED DESCRIPTION OF VARIOUS ASPECTS

The following description is merely exemplary in nature and is notintended to limit the present disclosure, application, or uses. Itshould be understood that throughout the drawings, correspondingreference numerals indicate like or corresponding parts and features.The description and any specific examples, while indicating embodimentsof the present disclosure, are intended for purposes of illustrationonly and are not intended to limit the scope of the present disclosure.

Referring generally to FIG. 1, the trading exchange data flow patternsamong various parties using a system for energy market hedging inaccordance with the present teachings is illustrated and generallyidentified at reference character 1. The energy market hedging system 1is incorporated into a secure web-based Cloud network centered aroundthe energy market hedging system 1 and involving a global energyexchange also referred to as Global Energy e-Bourse or the “Exchange”.The energy market hedging system 1 may be extended to the followingauthorized communities of interest (COI) linked around the world over asecure web-based Cloud network: commercial and speculator customers 2;introducing brokers 3; non-clearing commissioned merchants 4; clearingmembers of the Exchange 5; non-clearing members of the Exchange 6;clearing house 7; and reporting services 8.

The commercial and speculator customers 2 are exposed to market pricevolatility of Middle East (ME) crude oils and refined products varyingas to quality (e.g., API gravity; sulfur content), geographic and tankerdelivery characteristics. Thus, the customers 2 seek protection againstfuture adverse market price movements by buying and selling standardizedfutures, options, forwards, swaps and spreads centrally traded over theExchange, involving the use of proprietary ME-centric benchmarks andindexes.

Entitled intermediaries engaged between those parties noted directlyabove and the Exchange include the introducing brokers (IB) 3,non-clearing commissioned merchants (NCCM) 4 and clearing members of theExchange 4 that are also commissioned merchants (CMCM). However, itshould be noted that although those entitled intermediaries may beengaged in commercial relationships with certain Exchange customersnoted above, they are not involved as intermediaries in the chain ofExchange communications, as described more fully below. The non-clearingmembers of the Exchange (NCMEs) 5 may conduct proprietary trading fortheir own account as well as for their managed clients' accounts.

Clearinghouses 7 and reporting services 8 may be contracted by theExchange to clear, settle and report all executed trades while ensuringthat credit risks are managed via required “marks-to-market” and themaintenance of customer margin deposits, as well as (where applicable)the guaranteed deposits of CMs.

In order to acquire and maintain authorized status, COI must employExchange-specified contracts, benchmarks and indexes, as well asExchange-developed hardware, software applications and processes relatedthereto, all supplied to COI for use over the secure web-based Cloudnetwork so that bids and offers will be authenticated, posted andultimately matched, executed and confirmed as trades to be cleared,settled and reported in compliance with policies and rules establishedby the Exchange.

Following is a description of those key elements of the web-based Cloudnetwork which are integral to the secure and effective conduct ofExchange business. They are broken into three (3) interdependent aspectsnoted below, which taken together, create a fluid pool of resourcesacross all servers and data centers enabling COI to access all that isprovisioned on an as-needed and authorized basis:

Front-end: The Exchange's front-end is globally populated by virtualservers acting as the flexible portion of the web-based Cloud network;in all, COI in more than 20 countries are expected to have virtualservers. They may take the form of users' independently employedpersonal computers, tablets, smart phones or even data interchangeterminals tied to other trading systems (as permitted), subject torequirements that they must be (i) compatible with all Exchange-providedsoftware applications and (ii) interconnected with an Exchange-supplied“dongle” described below. Alternatively, the Exchange can supply COIwith its proprietary data interchange terminals containing the requisitesoftware applications and dongle. Either way, front-end virtual serversinter alia perform the following functions:

receive all notifications from the Exchange re: the user's authorizedstatus, as well as all software applications and updates provided by theExchange;

confirm all relationships with entitled intermediaries, including theterms and conditions associated with commissions & fees (C&F), marginguarantees, etc.;

receive notifications from the Exchange re: all moneys payable orreceivable in connection with open trades, settled trades and entitledintermediaries' C&F; and

transmit trade orders to the Exchange in the form of bids and offers,which denote:

-   -   Commodity type (including but not limited to Crude Oil, Unleaded        Gasoline, Gasoil/Diesel or Heavy Fuel Oil) or index type (Crude        Oil API Gravity Value, Crude Oil Sulfur Content Value, Gasoil        Quality Value, Residual/Heavy Fuel Oil Quality Value,        Gasoil/Diesel Crack Spread Differential Value, Daily Transit        Lease Rate for Tankers, or Daily Warehouse Lease Rate for        Tankers)    -   Benchmark applied in the case of crude oil derived from one of        several composites of oil fields located throughout the ME,        computed on a weighted average (WA) basis (including but not        limited to MEWA Extra Light, MEWA Light or MEWA Medium)    -   Terms and delivery point (if FOB: Arabian/Persian Gulf or Suez);        (if CIF: various)    -   Type of contract (futures, options, forwards, swaps or spreads),        as well as contract expiration and delivery date(s)    -   Settlement type: financial (cash equivalent) or physical        delivery (also referred to as Exchange Futures for Physical        Delivery or “EFP”)    -   Bid or offer price and volume (in terms of number of contracts,        each of which is denominated in the number of barrels or gallons        or weight of the underlying commodity)

receive confirmations of authorized executed trades from the Exchange;

receive notifications from the Exchange's clearinghouse re: requiredmargin levels to be posted and maintained in connection with open tradepositions and “marks-to-market”, as well as notifications concerningclearance and settlement of trades, including details that depend onhow/where they are to be settled (financially versus physical delivery);

receive reports of trade activity conducted at the Exchange (such asprices and volume associated with open bids and offers, as well asexecuted trades; and open interest and other historical trade data); and

receive notification of all Exchange and clearinghouse policies andrules, as well as updates concerning all Exchange-specified futures,options, forwards, swaps, spreads, benchmarks, indexes, position limitsand margin requirements.

Dongle: A dongle is a proprietary data storage hardware device loadedwith software needed to inter alia provide security and authenticatevirtual servers employed by the Exchange's COI. Dongles made accordingto Exchange specifications are supplied to COI either as (i) serializedUSB thumb drives or stick devices connectable to independently employedservers, which require a PIN to reboot the server into an ExchangeCloud-enabled operating environment or (ii) an integral component of theExchange's proprietary data interchange terminal. Dongles enable theExchange to exercise controls over who can access what data at any giventime, where data is stored and who manages the various storage needs andserver networks, be they at the front or host end of the Exchange'sweb-based Cloud. Dongles facilitate transformational data protection viasophisticated encryption that bit-splits data from multiple slices (orshares) and adds authentication and fault tolerant information as itmoves through the web-based Cloud network. This inter alia allows COI toshare the same infrastructure without fear of other COI or the generalpopulation at-large accessing data that is not intended to be openlyavailable.Alternatively or additionally, authorized Exchange software downloadstaking place at authenticated server hardware located over theExchange's Cloud network may be used to facilitate transformational dataprotection described above.Host Server: In addition to the front-end and dongle, proprietarystorage networks (aka the host server) make up the last aspect of theExchange's web-based Cloud network. The host server is configured toaccomplish the following:

notify all virtual front-end servers of their authorized COI status, aswell as all Exchange and clearinghouse policies, rules and updatesconcerning inter alia all Exchange-traded futures, options, forwards,swaps, spreads, benchmarks, indexes, position limits and marginrequirements;

distribute all software applications and updates provided by theExchange to authorized COI virtual servers;

receive all authenticated customer bids/offers, which are posted andmatched with the posted offers/bids of other customers, resulting inconfirmations of all executed trades, the data of which is alsotransmitted to applicable trade counterparties and entitledintermediaries, as well as to the Exchange's contracted clearinghouseand reporting service firm(s);

facilitate via the Exchange's contracted clearinghouse theposting/maintenance of all required margin levels based on the attendantopen trade positions;

facilitate via the Exchange's contracted reporting service firm(s) thefulsome and accurate reporting of all trade activity conducted at theExchange such as posted prices and volumes associated with open bids andoffers, as well as executed open trades, open interest, settled tradesand all other historical trade data;

based on confirmations received from applicable COI and underlyingexecuted trade data, compute all C&F and other charges associated witheach open and settled trade, and notify all affected parties of theirrespective amounts payable or receivable in connection therewith; and

provide a platform for account and payment management, alerts andentitlements in connection with the amounts noted directly above.

The host server is designed to be multi-faceted and scalable tosufficiently accommodate several Exchange offices posted around theworld. The host server network has been designed to accommodatefacilities dedicated solely to the Exchange and/or at qualified remoteshared Cloud data resource centers independently contracted by theExchange.

Accordingly, the present teachings provide a system for energy markethedging extended to authorized commercial and speculating parties thatare exposed to market price volatility of ME crude oils and refinedproducts with varying quality and geographic characteristics. The systemfor energy market hedging includes an all-electronic exchange platformdedicated to the transparent trading of energy derivatives, includingbut not limited to futures, options, forwards, swaps and spreads, allbased on ME-centric benchmarks and indexes for global execution over asecure web-based Cloud network.

The system for energy market hedging of the present teachings considersthe impact of proposed regulatory initiatives and enables the use ofenergy derivatives, such as forwards, swaps and spreads, to be traded ina manner that comports with a more stringent global regulatoryenvironment.

In certain applications, it may be desirable to provide a system thatpermits execution of a derivatives trade electronically at a pointsomewhere in the Cloud communication chain, rather than at the hostserver located at the Exchange's headquarters. For example, host serversmay be based in a particular country (e.g., the U.S.) to providestrategic and/or economic advantages.

Referring now to FIG. 2, a summary of Middle East-Centric Benchmarks andComplementary Indexes utilized by the system for energy market hedgingis presented below. Crude oil benchmarks, each derived from a compositeof ME oil fields, which are subject to change from time to time, includethe following: 1) ME Weighted Average (MEWA) Extra Light Crude Oil (APIgravity of 39.66° and sulfur content of 0.99%); 2) MEWA Light Crude Oil(API gravity of 33.15° and sulfur content of 1.69%); and 3) MEWA MediumCrude Oil (API gravity of 29.75° and sulfur content of 2.49%).

The system for energy market hedging further utilizes refined productbenchmarks including the following: 1) Unleaded Gasoline (500 ppmsulfur), 2) Gasoil/Diesel (500 ppm sulfur) and Gasoil Crack Spread(between 500 ppm Gasoil and MEWA Light Crude Oil), and 3) Residual/HeavyFuel Oil (35,000 ppm sulfur).

The system for energy market hedging further utilizes complementarydifferential value indexes including but not limited to thefollowing: 1) Crude Oil API Gravity Value Index focused on variabilityof API gravity prevalent among crudes produced at ME oil fields, basedon value associated with 1.00° differential; 2) ME Crude Oil SulfurContent Value Index focused on variability of sulfur content prevalentamong crudes produced at ME oil fields, based on value associated with0.1% differential; the aforementioned crude oil differential indexes arestructured for trade alongside the Exchange's crude oil EFP futures,valuing variances between the selected benchmark and actual crudesdelivered; fee discounts apply when said indexes are traded as designed;4) Gasoil (Diesel) Quality Value Index (attributable to each 500 ppm ofsulfur content differential); and 5) Residual/Heavy Fuel Oil QualityValue Index (attributable to each 5,000 ppm of sulfur contentdifferential).

The system for energy market hedging further utilizes Tanker Lease RateIndexes, which focus on variability of costs and expenses factored intanker leases—excluding fuel costs, which can be hedged via use of theExchange's Residual/Heavy Fuel Oil futures and options: 1) Daily TransitLease Rate Index tied to tankers (VLCC and Suezmax, respectively)earmarked for hauling ME crude oil to East of Suez destinations; and 2)Daily Warehouse Lease Rate Index tied to tankers (VLCC and Suezmax,respectively) earmarked for warehousing ME crude oil headed to East ofSuez (also able to provide Transit and Warehouse Lease Rate Indexes forsmaller crude oil and refined product tankers). Futures and options arepriced in U.S. Dollars; other terms—e.g., based on a Global ReservesBasket Index comprised of a variety of commodity and currency assetclasses commonly employed commercially in ME and East of Suezmarkets—can also be provided.

The system for energy market hedging further utilizes an EFPQualification Process in which ME-Centric Crude Oil Futures arecomplemented by API Gravity Value and Sulfur Content Value Indexes. TheEFP Qualification Process includes the following steps. Stage 1, MEcrude oil meeting criteria noted below qualifies for delivery within theExchange's assigned settlement period (per terms of respective EFPcontract): To use MEWA Extra-Light crude oil benchmark, deliverable MEcrude oil must be derived from an “Extra-Light” field or otherwise haveAPI gravity >36° and sulfur content <1.4%. To use MEWA Light crude oilbenchmark, deliverable ME crude must be derived from a “Light” field orotherwise have API gravity between 33° and 36° and sulfur contentbetween 1.4% and 2.0%. To use MEWA Medium crude oil benchmark,deliverable ME crude must be derived from a “Medium” field or otherwisehave API gravity between 30° and 33° and sulfur content between 2.0% and2.9%. ME crude oil not meeting specific criteria per above may stillqualify for settlement under EFP terms but must first be formallyassigned an Exchange-authorized benchmark for trading.

Stage 2 (for ME crude oil meeting Stage 1 qualification): Cumulative APIgravity and sulfur content differentials—derived by comparing actual(per Exchanged-recognized assay) and specified benchmark crudes—mustalso be settled at delivery.

For example, assume Party A (ME crude oil producer) holds a net shortposition of 800 contracts of MEWA Light Crude Oil EFP Futures expiringDecember 2012 and agrees to deliver 800,000 barrels of ME crude assayedas having API Gravity of 34° and sulfur content of 1.89%. Thus, Party Amust also deliver the following: 1) 680 contracts (short) of Crude OilAPI Gravity Value Index Futures expiring in December 2012; computed bymultiplying 800 times the difference between the benchmark)(33.15° andthe actual ME crude oil delivered (34°), or 680 contracts—in this case,short because the delivered crude is higher quality than the benchmark.2) 168 contracts (long) of Crude Oil Sulfur Content Value Index Futuresexpiring in December 2012; computed by multiplying 800 times thedifference between the benchmark (1.68%) and actual ME crude oildelivered (1.89%), or 168 contracts—in this case, long because thedelivered crude is of lesser quality than the benchmark. Incompletedelivery of complementary index futures in manner described above willresult in Exchange-imposed cash adjustments, which are a factor of therequisite number of complementary futures called for under thecircumstances and any adverse effects of post-expiration market pricemoves, plus applicable fees levied by the Exchange.

Referring now to FIG. 3, a system 50 for trading fuels according to thepresent disclosure is shown. The present disclosure uses crude oils onlyas an example of a fuel or an energy resource. The teachings of thepresent disclosure may be applicable to other types of fuels or energyresources including but not limited to natural gas, coal, and so on, aswell as refined products derived from crude oil. In general, theteachings of the present disclosure may be applicable to any commoditythat is produced and shipped globally and that has varying properties.

The system 50 comprises a plurality of servers 52-1, 52-2, . . . , and52-N, where N is an integer greater than or equal to 1 (collectivelyservers 52); a plurality of trading devices 54-1, 54-2, . . . , and54-N; and Internet 56. The servers 52 constitute an exchange for tradingthe fuels. The servers 52 may be located in a single location or may bedistributed in multiple locations. The servers 52 may be interconnectedvia the Internet 56. Alternatively or additionally, the servers 52 maybe interconnected via local area networks (LANs) and/or wide areanetworks (WANs). The servers 52 may communicate with a plurality of fuelproducers', users' and speculators' facilities via the Internet 56.

The trading devices 54 may be located all around the world and are usedby traders to communicate with the exchange and to trade the fuels overthe exchange. The trading devices 54 may communicate with the servers 52via the Internet 56, a LAN, and/or a WAN.

Referring now to FIG. 4, an example of a computing device 100 is shown.The computing device 100 may be used to implement the servers 52 and thetrading devices 54. The computing device 100 may include a personalcomputer (PC), a laptop computer (laptop), a mobile computing device, ora mobile internet device (MID). The mobile computing device may includea smartphone, a personal digital assistant (PDA), or a tablet. Thecomputing device 100 may communicate with the Internet 56 via a link104. The link 104 may be wired or wireless.

In FIG. 4, only core components relevant to understanding the presentdisclosure are shown. It is understood that depending on configuration,the computing device 100 may include additional components not shown.For example only, the computing device 100 may comprise a centralprocessing unit (CPU) 110, memory 112, a peripheral control module 114,peripheral devices 116, an input/output (I/O) control module 118, I/Odevices 120, and a communication module 130. The CPU 110, memory 112,and other modules of the computing device 100 communicate via a bus 122.

The CPU 110 runs an operating system (OS) and application programs. TheCPU 110 processes data that is transmitted and received by the computingdevice 100 via the Internet 56. Memory 112 stores data processed by theCPU 110 and by the other modules of the computing device 100.

The peripheral control module 114 controls the peripheral devices 116 ofthe computing device 100. The peripheral devices 116 may include one ormore hard disk drives (HDDs), compact disc (CD) drives, and/or digitalversatile disc (DVD) drives. The peripheral devices 116 store the OS andthe application programs executed by the CPU 110.

The I/O control module 118 controls the I/O devices 120 of the computingdevice. The I/O devices 120 may include a keypad, a display, and/or apointing device. The pointing device may include a mouse and/or atouchpad. Additionally or alternatively, the computing device 100 mayinclude a voice recognition system. The user may interact with thecomputing device 100 using the voice recognition system. For example,the user may input voice commands via the voice recognition system.

The communication module 130 can communicate with the Internet 56. Thecommunication module 130 can transmit data to Internet 56 and receivedata from the Internet 56.

Referring now to FIG. 5, the computing device 100 may include thefollowing additional modules when the computing device implements one ofthe servers 52. For example, the computing device 100 implementing theservers 52 may include a data collection module 200, a selection module202, a weight generating module 204, a benchmark generating module 206,an order processing module 208, and an order execution module 210. Themodules may be implemented by a combination of the hardware and softwareexecuted by the CPU 110 of the computing device 100.

The data collection module 200 collects data for a plurality of fuels.The communication module 130 may communicate with a plurality ofauthorized fuel production data facilities via the Internet 56 andprovide the data to the data collection module 200. The data may includegeographic locations where the fuels are discovered, a rate ofextraction of the fuels, and properties of the fuels. The fuels mayinclude crude oils having varying properties. The properties may includespecific API gravity and sulfur content of the fuels.

The selection module 202 selects fuels from the plurality of fuels basedon the properties of the fuels to generate sets of fuels. In otherwords, the selection module 202 groups fuels into sets based on theproperties of the fuels. For example, see FIG. 2 showing crude oilsgrouped into three groups based on their respective API gravity andsulfur content.

The weight generating module 204 generates weights for generatingweighted averages. A weight for generating a weighted average for a fuelin a set is based on a rate of extraction of the fuel relative to anaggregate rate of extraction of the fuels in the set. For example, inFIG. 2, Qatar Dukhan crude oil is extracted at a rate of 300,000 BPD,which is nearly 10% of the aggregate rate of production of nearly 3million BPD for a set of crude oils grouped as MEWA Extra Light CrudeOil. Qatar Dukhan crude oil has an API gravity of 41.1° and sulfurcontent of 1.22%. Applying the weight of 300,000 divided by 3 million(i.e., 10%) to the API gravity and the sulfur content of Qatar Dukhancrude oil, the weighted API gravity and sulfur content of Qatar Dukhancrude oil becomes nearly 4.00 and 0.12%, respectively.

The benchmark generating module 206 generates benchmarks indicatingaggregate compositional qualities of the sets of fuels. A benchmark(also called a fuel commodity benchmark) for a set of fuels is generatedbased on weighted averages of the properties of the fuels in the set offuels. For example, in FIG. 2, the benchmarks for the MEWA Extra LightCrude Oil are a sum of the weighted averages of the properties of theconstituent crude oils. That results in a benchmark having API gravityof 39.66° and sulfur content of 0.99%.

The communication module 130 communicates the benchmarks to traders andreceives orders for derivatives contracts for the fuels from the tradersto buy or sell derivatives contracts based on the benchmarks. The ordersfor derivatives contracts include futures and options, as well asforwards, swaps and spreads traded directly between the traders and fuelproducers via the Exchange comprising the servers 52 and without usingintermediaries in the chain of Exchange communications. The orders mayalso include tanker derivatives contracts related to transporting andwarehousing the fuels described above.

The order processing module 208 processes an order for a fuel based ondifferences between actual properties of the fuel to be delivered underthe terms of EFP Futures and the aggregate qualities indicated by theoperative benchmark for a set of fuels comprising the ordered fuel. Seethe trading example described above in detail. The order executionmodule 210 executes the trade and provides order execution data to thetrader via the communication module 130. Executing an order encompassesorders being authenticated, posted, matched, executed and confirmed,cleared, settled and reported.

The data collection module 200 periodically updates the data such as BPDfor the fuels. The benchmark generating module 206 generates the updatedbenchmarks based on the updated data. The communication module 130communicates the updated benchmarks to the traders.

Referring now to FIG. 6, a flowchart of a method 300 for trading fuelsaccording to the present disclosure is shown. At 302, control collectsdata for a plurality of fuels, where the data include geographiclocations where the fuels are discovered, a rate of extraction of thefuels, and properties of the fuels. At 304, control selects fuels fromthe plurality of fuels based on the properties of the fuels to generatesets of fuels. At 306, control generates weights for generating weightedaverages, where a weight for generating a weighted average for a fuel ina set is based on a rate of extraction of the fuel relative to anaggregate rate of extraction of the fuels in the set. At 308, controlgenerates benchmarks indicating aggregate compositional qualities of thesets of fuels, where a benchmark for a set of fuels is generated basedon weighted averages of the properties of the fuels in the set of fuels.

At 310, control communicates the benchmarks to traders and receivesorders for derivatives contracts for the fuels from the traders to buyor sell derivatives contracts based on the benchmarks. At 312 controlprocesses an order for a fuel based on differences between actualproperties of the fuel to be delivered and the aggregate qualitiesindicated by a benchmark for a set of fuels comprising the ordered fuel.At 312, control executes the orders, taking into account thecomplementary Crude Oil API Gravity Value and Crude Oil Sulfur ContentValue indexes, which are intended to be used in conjunction with EFP(not cash settled) futures contracts, and provides execution data to thetraders.

At 314, control updates the data periodically, generates updatedbenchmarks based on the updated data, and communicates the updatedbenchmarks to the traders. In this manner, control executes orders thatinclude futures and options, as well as forwards, swaps and spreads,including tanker contracts related to transporting and warehousing thefuels, which are traded directly between the traders and fuel producersover the Exchange and without using intermediaries in the chain ofExchange communications. In some implementations, the method 300 isimplemented by one or more processors that execute software designed toperform the method 300.

In general, an energy market hedging system according to the presentdisclosure is summarized below. The energy market hedging systemprovides potential price protection to authorized producers and users ofMiddle East (ME) crude oils and refined products while also offeringauthorized speculators potential profit opportunities from attendantmarket price volatility. The system comprises globally scatteredcommunities of interest (COI) operating over a web-based Cloud networkcentered around a Global Energy exchange also referred to hereafter asGlobal Energy e-Bourse or the “Exchange”, which is the entity in chargeof the following functions.

For example, the functions include specifying futures, options,forwards, swaps, spreads and other derivatives associated with thebuying, selling, storing, shipping and delivery of varying grades of MEcrude oil and refined products typically exported to customers incountries scattered throughout the world; listing said futures, options,forwards, swaps, spreads and other derivatives that are extended to thefollowing COI: clearing members of the Exchange that maintain capitaldeposits to guarantee transactions in the event of customer defaults,non-clearing members of the Exchange, commissioned merchants,introducing brokers, trading counterparties in the form of commercialsand speculators (aka Exchange customers), clearinghouses and reportingservices, all of which are geographically scattered throughout theworld.

Further, the functions include providing a transparent all-electronicdata interchange platform able to authorize, transmit, receive, match,confirm, report, clear, settle and otherwise execute buy and sell tradeorders for all listed futures, options, forwards, swaps, spreads andother derivatives with the capability of originating said ordersvirtually anywhere in the world over a secure web-based Cloud network;establishing all Exchange policies and rules and overseeing thecompliance therewith; arranging for all trades to be cleared and settledby qualified clearinghouses; obtaining all requisite licenses and otherapprovals granted by applicable government regulatory bodies; andimplementing all operating and reporting systems and processes conduciveto the overall conduct of exchange business.

The listed futures, options, forwards, swaps, spreads and otherderivatives are directly or indirectly linked to crude oil benchmarksnotionally differentiated by their respective weighted average APIgravity and sulfur percentage (%) content, each derived from a compositeselection of crude oils produced in fields located throughout the MEregion of the world, with the selection and related data being subjectto change by the Exchange from time to time.

The all-electronic data interchange platform comprises a front-end,proprietary data storage hardware devices (aka dongles), and proprietarystorage networks aka the host server. The front-end is populated by COIwith virtual servers acting as the flexible portion of the web-basedCloud network. The proprietary data storage hardware devices (akadongles) are loaded with software needed to facilitate transformationaldata protection via encryption that bit-splits data from multiple slices(or shares) and add authentication and fault tolerant information asdata moves through the web-based Cloud network, allowing COI to sharethe same network infrastructure without fear of other COI or the generalpopulation at large accessing data that is not intended to be openlyavailable, thereby providing controls over who can access specific dataat any given time, where data is stored and who manages various storageneeds and server networks. The proprietary storage networks aka the hostserver are multi-faceted and scalable to sufficiently accommodateseveral Exchange facilities around the world dedicated solely to theExchange and/or at qualified remote shared Cloud data resource centersindependently contracted by the Exchange.

The front-end virtual servers can take the form of the following: COIusers' independently employed personal computers, tablets, smart phonesor even data interchange terminals tied to other trading systems (wherepermitted) subject to requirements that they must be compatible withExchange-provided software applications and interconnected with anExchange-supplied dongle; or proprietary data interchange terminals madeto Exchange specifications and containing the requisite softwareapplications and dongle.

The front-end virtual servers are employed to perform the followingfunctions: For example, the functions include receiving allnotifications from the Exchange regarding the user's authorized statusas well as all software applications and updates; and confirming allrelationships with entitled intermediaries, including the terms andconditions associated with commissions and fees (“C&F”), marginguarantees, etc.

The functions further include transmitting trade orders to the Exchangein the form of bids and offers that inter alia denote the following:commodity type (including but not limited to Crude Oil; Unleadedgasoline; Gasoil/Diesel; or Residual/Heavy Fuel Oil) or index type(including but not limited to Crude Oil API Gravity Value, Crude OilSulfur Content Value, Gasoil Quality Value, Residual/Heavy Fuel OilQuality Value, Gasoil Crack Spread Differential, Daily Transit Lease forTankers (VLCC and Suezmax, respectively), or Daily Warehouse Lease Ratefor Tankers (VLCC and Suezmax, respectively).

The functions further include transmitting benchmark in the case ofcrude oil derived from one of several composites of oil fields locatedthroughout the ME, computed on a weighted average (WA) basis, which aresubject to change from time to time (including but not limited to MEWAExtra Light, MEWA Light or MEWA Medium); terms and delivery point (suchas FOB: Arabian/Persian Gulf or Suez; or CIF: various destinations).

The functions further include transmitting type of contract or agreement(including but not limited to futures, options, forwards, swaps orspreads), as well pertinent expiration and delivery date(s); type ofsettlement (financial [cash or equivalent] or physical delivery); andbid or offer price and volume (in terms of number of contracts, each ofwhich is denominated in the number of applicable barrels or gallons orweight of the underlying commodity).

The functions further include transmitting receiving notifications fromthe Exchange regarding all confirmed and executed trades, moneys payableor receivable in connection with open trades, settled trades andentitled intermediaries' C&F.

The dongles are made according to Exchange specifications and suppliedto COI either as serialized USB thumb drives or stick devicesconnectable to independently employed servers, requiring a PIN to rebooteach server into an Exchange Cloud-enabled operating environment; or asan integral component of the Exchange's proprietary data interchangeterminal.

The host server is employed to perform the following functions: Forexample, the functions includes notifying all virtual front-end serversof their authorized COI status, as well as all Exchange andclearinghouse policies, rules, and updates concerning inter alia allExchange-traded futures, options, forwards, swaps, spreads, benchmarks,indexes, position limits and margin requirements. The functions furtherinclude distributing all software applications and updates provided bythe Exchange to authorized COI virtual servers; and receiving allauthenticated customer bids/offers, which are posted and matched withthe posted offers/bids of other customers, resulting in confirmations ofall executed trades, the data of which is then transmitted to affectedtrade parties and entitled intermediaries, as well as to the exchange'scontracted clearinghouse(s) and reporting service firm(s).

The functions further include facilitating via the Exchange's contractedclearinghouse(s) the posting and maintenance of all required marginslevels based on the attendant open trade positions; and facilitating viathe Exchange's contracted reporting service(s) the fulsome and accuratereporting of all trade activity conducted at the Exchange such as postedprices and volumes associated with open bids and offers, as well asexecuted open trades, open interest, settled trades and all otherhistorical data.

The functions further include, based on confirmations received fromapplicable COI and underlying executed trade data, computing all C&F andother charges associated with each open and settled trade, and notifyall affected parties of their respective amounts payable or receivablein connection therewith; and providing a platform for account andpayment managements, alerts and entitlements in connection with thepayable or receivable amounts noted directly above.

The trade margining, marks-to-market, clearing and settlement functionsare facilitated by qualified clearinghouses consisting either of anaffiliate of the Exchange or independently contracted clearinghouse(s),each being COI in the web-based Cloud network.

As used herein, the term module may refer to, be part of, or include anApplication Specific Integrated Circuit (ASIC); an electronic circuit; acombinational logic circuit; a field programmable gate array (FPGA); aprocessor (shared, dedicated, or group) that executes code; othersuitable hardware components that provide the described functionality;or a combination of some or all of the above, such as in asystem-on-chip. The term module may include memory (shared, dedicated,or group) that stores code executed by the processor.

The term code, as used above, may include software, firmware, and/ormicrocode, and may refer to programs, routines, functions, classes,and/or objects. The term shared, as used above, means that some or allcode from multiple modules may be executed using a single (shared)processor. In addition, some or all code from multiple modules may bestored by a single (shared) memory. The term group, as used above, meansthat some or all code from a single module may be executed using a groupof processors. In addition, some or all code from a single module may bestored using a group of memories.

In some implementations, the systems and methods disclosed herein can beimplemented on any computing devices such networked together, where thecomputing devices include servers, desktop computers, and handheldcomputing devices such as tablets and smartphones. In theseimplementations, the modules described herein can be implemented onthese devices using a combination of software and hardware that providethe desired functionalities. Due to connectivity and interactionsbetween the modules and the computing devices, integrating the moduleswith the computing devices creates specialized computing devices thatare specifically suitable for the systems and methods disclosed herein.

While specific examples have been described in the specification andillustrated in the drawings, it will be understood by those skilled inthe art that various changes may be made and equivalence may besubstituted for elements thereof without departing from the scope of thepresent teachings as defined in the claims. Furthermore, manymodifications may be made to adapt a particular situation or material tothe present teachings without departing from the essential scopethereof. Therefore, it may be intended that the present teachings not belimited to the particular examples illustrated by the drawings anddescribed in the specification as the best mode of presentlycontemplated for carrying out the present teachings.

What is claimed is:
 1. A system comprising: a data collection modulethat collects data for a plurality of fuels, wherein the data includegeographic locations where the fuels are discovered, a rate ofextraction of the fuels, and properties of the fuels; a selection modulethat selects fuels from the plurality of fuels based on the propertiesof the fuels to generate sets of fuels comprising fuel commoditybenchmarks; a weight generating module that generates weights forgenerating weighted averages, wherein a weight for generating a weightedaverage for a fuel in a set is based on a rate of extraction of the fuelrelative to an aggregate rate of extraction of the fuels in the set; abenchmark generating module that generates the fuel commodity benchmarksindicating aggregate qualities of the sets of fuels, wherein a fuelcommodity benchmark for a set of fuels is generated based on weightedaverages of the properties of the fuels in the set of fuels; acommunication module that communicates the fuel commodity benchmarks totraders and that receives orders for derivatives contracts from thetraders to buy or sell derivatives contracts based on the fuel commoditybenchmarks; and an order processing module that processes an order forderivatives contracts based on differences between actual properties ofthe fuel to be physically delivered under the terms of an operativederivatives contract and the aggregate qualities indicated by anoperative fuel commodity benchmark.
 2. The system of claim 1 wherein:the data collection module updates the data periodically; the benchmarkgenerating module generates updated fuel commodity benchmarks based onthe updated data; and the communication module communicates the updatedfuel commodity benchmarks to the traders.
 3. The system of claim 1wherein: the fuels include crude oils; and the properties includespecific API gravity and sulfur content of the fuels.
 4. The system ofclaim 1 wherein the orders for derivatives contracts encompass futures,options, forwards, swaps and spreads traded between the traders and fuelproducers via an Exchange providing the system and without usingintermediaries in a chain of Exchange communications, wherein thetraders include fuel users and market speculators.
 5. The system ofclaim 1 wherein the orders include derivatives contracts related tocosts of transporting and warehousing the fuels stored onboard tankers.6. The system of claim 1 wherein the fuels include crude oils, refinedproducts derived from crude oil, natural gas, and coal.
 7. A servercomprising the system of claim 1 wherein the server communicates with acomputing device used by one of the traders via a network including theInternet.
 8. A method comprising: collecting data for a plurality offuels, wherein the data include geographic locations where the fuels arediscovered, a rate of extraction of the fuels, and properties of thefuels; selecting fuels from the plurality of fuels based on theproperties of the fuels to generate sets of fuels comprising fuelcommodity benchmarks; generating weights for generating weightedaverages, wherein a weight for generating a weighted average for a fuelin a set is based on a rate of extraction of the fuel relative to anaggregate rate of extraction of the fuels in the set; generating thefuel commodity benchmarks indicating aggregate qualities of the sets offuels, wherein a benchmark for a set of fuels is generated based onweighted averages of the properties of the fuels in the set of fuels;communicating the benchmarks to traders and receiving orders forderivatives contracts for the fuels from the traders based on thebenchmarks; and processing an order for derivatives contracts based ondifferences between actual properties of the fuel to be delivered underthe terms of an operative derivatives contract and the aggregatequalities indicated by an operative fuel commodity benchmark.
 9. Themethod of claim 8 further comprising: updating the data periodically;generating updated fuel commodity benchmarks based on the updated data;and communicating the updated fuel commodity benchmarks to the traders.10. The method of claim 8 wherein: the fuels include crude oils; and theproperties include specific API gravity and sulfur content of the fuels.11. The method of claim 8 wherein the orders for derivatives contractsencompass futures, options, forwards, swaps and spreads, the methodfurther comprising trading the orders between the traders and fuelproducers via an exchange and without using intermediaries, wherein thetraders include fuel users and market speculators.
 12. The method ofclaim 8 wherein the orders include derivatives contracts related tocosts of transporting and warehousing the fuels stored onboard tankers.13. The method of claim 8 wherein the fuels include crude oils, refinedproducts derived from crude oil, natural gas, and coal.
 14. The systemof claim 1, wherein: the fuels include landlocked crude oils; and theproperties include specific API gravity, sulfur content and therespective geographic locations of the landlocked crude oil'sproduction, delivery and customer destination points.
 15. The system ofclaim 1, wherein the orders include derivatives contracts related to thecosts of transporting and warehousing the landlocked crude oils usingintermodal permutations, including but not limited to storage terminal,pipeline, boat, rail and/or truck solutions.
 16. The method of claim 1wherein: the fuels include landlocked crude oils; and the propertiesinclude specific API gravity, sulfur content and the respectivegeographic locations of the landlocked crude oil's production, deliveryand customer destination points.
 17. The method of claim 1, wherein theorders include derivatives contracts related to the costs oftransporting and warehousing the landlocked crude oils using intermodalpermutations including but not limited to storage terminal, pipeline,boat, rail and/or truck solutions.